Detail

Treasury Releases Proposed Regulations on FIRPTA Foreign Pension Fund Exemption

  • June 11, 2019

The Treasury Department yesterday issued proposed tax regulations clarifying the scope and operation of the foreign pension fund exemption from the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).  (Federal Register, June 7)  The proposed rules appear to be overwhelming positive and likely to resolve most, if not all, of foreign investors' remaining concerns.

The Treasury Department  issued proposed tax regulations clarifying the scope and operation of the foreign pension fund exemption from the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).  (Federal Register, June 7)  The proposed rules appear to be overwhelming positive and likely to resolve most, if not all, of foreign investors' remaining concerns.

  • FIRPTA imposes U.S. capital gains tax on the sale of a U.S. repeal property interest by a foreign investor.  FIRPTA results in a discriminatory tax on foreign investment in US real estate and infrastructure that does not apply to any other asset class.  The FIRPTA regime is an anti-competitive outlier that deflects global capital to other markets.
  • With the strong support of The Real Estate Roundtable, Congress passed in 2015 the first major reforms to FIRPTA since its enactment in 1980.  The changes included a new exemption from FIRPTA for qualified foreign pensions funds and doubled the amount a foreign interest may invest in a U.S. publicly traded REIT.  (Roundtable Weekly, Dec. 18, 2015) 
  • After passage of the 2015 PATH Act, some questions remained regarding whether certain foreign entities and arrangements would qualify for the foreign pension fund exemption.  The Roundtable encouraged Congress to clarify that the foreign pension fund definition covers a number of number of different arrangements, including:  governmental, Social Security-type plans; plans established for the self-employed; multi-employer plans; plans sponsored by political subdivisions; and situations where an entity pools retirement assets from multiple pension plans.
  • In March 2016, the Joint Committee on Taxation provided support for a broad interpretation of the FIRPTA foreign pension fund exemption with its "Blue Book" on tax legislation enacted in 2015.  (Roundtable Weekly, March 18, 2016)  In March 2018, Congress passed FIRPTA technical corrections legislation codifying many of The Roundtable's recommendations.  (Roundtable Weekly, Mar. 23, 2018; The Blue Slip, Mar. 2018)
  • The newly proposed regulations adopt a broad view on what constitutes a qualified foreign pension fund.  According to the regulations' preamble, "[t]he Treasury Department and the IRS have determined that the purpose of section 897(l) is best served by permitting a broad range of structures to be eligible to be treated as a qualified foreign pension fund."  This sentiment is then extended in the proposed rules to a wide range of pension arrangements, including multi-employer and government-sponsored public pension funds, as well as retirement funds organized by trade unions, professional associations, or similar groups. 
  • Additionally, the proposed regulations confirm that entities wholly owned by multiple foreign pension funds can qualify for the exemption.  Similarly, entities can qualify for the exemption indirectly through a chain of ownership.  These were important clarifications for common foreign pension fund structures.  

Building on the success of the PATH Act reform, The Roundtable and other stakeholders are encouraging Members of Congress to repeal FIRPTA entirely by passing the bipartisan Invest in America Act sponsored by Representatives John Larson (D-CT) and Kenny Marchant (R-TX).  (Roundtable Weekly, Apr. 12, 2019)  FIRPTA will be one of several tax topics discussed during The Roundtable's Annual Meeting on June 11 in Washington, DC and at the Tax Policy Advisory Committee meeting on June 12.